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LTCG tax in Union budget: Market mavens expect grandfathering clause to contain damage

Investors say long-term capital gains (LTCG) tax will dampen market sentiment but the impact will not be long lasting

india Updated: Feb 01, 2018 16:32 IST
Press Trust of India, New Delhi
LTCG tax in Union budget,LTCG tax,Union budget
Markets went into a frenzy for sometime on Thursday morning after finance minister Arun Jaitley announced a LTCG tax of 10 per cent on stock markets gains exceeding Rs 1 lakh. (Reuters File Photo)

Stock markets fell on Thursday over the proposal to tax long-term capital gains (LTCG) on equities in the Union budget, as investors said it will dampen sentiment but many expect the move to not have a long-term impact.

Presenting the Union budget, finance minister Arun Jaitley announced a LTCG tax of 10 per cent on stock markets gains exceeding Rs 1 lakh, sending the markets spiralling downwards for some time.

Welcoming the budget, BSE chief Ashishkumar Chauhan said the impetus to the International Financial Services Centre (IFSC), gold exchanges, disinvestment, ETFs for debt financing and measures to revive corporate bond markets augers well for the capital markets. But he didn’t comment on the LTCG tax proposal.

Criticising the move, Reliance Securities chief executive B Gopkumar said taxing LTCG without removing the securities transaction tax “makes us probably the only nation to have both taxes at the same time.”

However, he ruled out any major hit on the market sentiment saying “the grandfathering of cost prices for LTCG tax will prevent any knee-jerk reaction in stock prices but this tax is a clear negative for equity markets as far as sentiment goes”.

Echoing similar views, Metropolitan Stock Exchange chief operating officer Abhijit Chakraborty said the market is disappointed over the LTCG tax proposal. “but if corporate earnings grow at a healthier pace, this will result in higher capital gains then a marginal tax should not hurt investors”.

“I believe the immediate negative reaction will be more than nullified in the medium-term due to the improvement in overall corporate earnings outlook,” he added.

But brokers association ANMI national president K Suresh said the move to tax LTCG and to retain the securities transaction tax “will dampen the investor sentiments”.

“While tax will adversely affect serious investors, who are funding the growth story, it won’t have any impact on short-term traders,” he added.

Echoing the view, Reliance Securities chief executive B Gopkumar said levying the tax without tinkering with STT “makes India a probably the only nation to have both taxes at the same time”.

“Grandfathering of cost prices for LTCG will prevent any knee-jerk reaction in stock prices but imposition of tax is a clear negative for equity markets as far as sentiments are concerned,” Gopkumar added.

Noting that LTCG tax exemption was an attraction for new investors into equity and brought funds from other low- paying avenues, HDFC Securities chief executive Dhiraj Relli said, “rising interest rates domestically and tax on LTCG could result in minor reversal of this trend”.

IIFL Wealth partner Amar Ambani commented that investors or co-owners in a listed company already suffer taxation on multiple fronts and would now have to face LTCG tax as well.

“However, I do not expect a prolonged impact on equities. The market is a lucrative avenue and so the show will go on,” Ambani said.

Opining that introduction of LTCG tax will dampen returns from the markets, PWC India’s Gautam Mehra said, “the grandfathering provisions should minimize immediate volatility in this transition”.

However, some market participants supported the move, terming it as a rational move. “The decision to tax gains from equities is not surprising and is unlikely to have any significant adverse impact on the markets,” Union AMC’s chief executive G Pradeepkumar said.

“This still keeps equities as the most attractive asset class from a taxation perspective since the holding period to be eligible for LTCG tax exemption on most other asset classes is three years. The fact that gains made up to January 31, 2018 will be grandfathered indicates that the government has thought through the proposal quite clearly.”

Sanctum Wealth Management’s Sunil Sharma said, “given the strong inflows the equity markets have witnessed, government made a rational decision to make tax structures uniform across various investments”.

“So far equities enjoyed a tax advantage relative to fixed income and other asset classes. We now join other world markets in instituting tax on equities,” he added.

Essel Finance’s Amitabh Chaturvedi also supported the LTCG tax saying this is a way to track and control tax evasion by many. Overall this is a positive budget overall “.

However, striking a contrarian stance, Samco Securities’s Jimeet Modi termed the proposal as a “fair treatment,” which will augment the country’s image globally which hitherto was dubbed as retro tax country”.

First Published: Feb 01, 2018 16:29 IST